American Airlines seeks to void labor contracts

The parent of American Airlines on Monday sought bankruptcy court approval to throw out labor contracts, a move that puts new pressure on pilots, flight attendants and other unionized workers to quickly agree to concessions.

Chief Executive Tom Horton said in a letter to employees that the "best outcome" remains negotiated settlements, and promised to continue working with unions toward that end.

All contracts will remain in effect while the New York bankruptcy court considers the company's request.

"With losses mounting and oil prices rising, there is growing urgency to move more quickly. The bankruptcy law provides a process for the court to address such a situation as has been done in virtually all prior successful airline restructurings," Horton said.

AMR also sought permission to seal from the public all or part of its forthcoming motion to terminate contracts. "The confidential material contains sensitive and confidential information that should not be publicly disclosed, and the disclosure of which could harm AMR," the company said in its filing.

American wants to slash overall costs by $2 billion annually. More than half of the savings would come from labor, including a plan to shed 13,000 jobs.

American has negotiated for years with most of its labor groups on new contracts since unions agreed to hefty concessions to keep the airline out of bankruptcy in 2003. Since bankruptcy, those talks have taken on a more urgent tone and pace. But agreements remain elusive.

The Transport Workers Union, which represents seven American Airlines work groups, said in a statement that its negotiators still want consensual deals.

"If we are unable to reach an agreement, we will represent our members in court and explore all options," TWU president James Little said in an email ahead of the filing.

'NOT A VELVET HAMMER'

With airlines reeling from high costs and sapped travel demand in the years immediately after the 2001 hijack attacks, major carriers one-by-one sought refuge in bankruptcy. There they made full use of the legal process to achieve double-digit wage cuts and work rule changes that helped make them more competitive by the end of the decade.

The right of a company to reject collective bargaining agreements may be granted by a judge under section 1113 of the U.S. bankruptcy code. Arguments around those requests often provide the highest drama of an airline bankruptcy.

"It's been widely employed, and not just in this round of restructurings, but in prior restructurings as well," said Robert Mann, an independent airline consultant.

"It's the hammer and not a velvet hammer. It's essentially a brass-knuckles approach to restructuring," he said.

Mann noted that even if airlines take the plunge and void contracts, they often leave the door open for further negotiations later, if only to mend fences with their outraged work forces.

"Anybody putting money into a restructuring hopes to have everyone at the airline on their team," Mann said, referring to potential airline investors. And if you create and maintain a very acrimonious environment by imposing a draconian 1113, you're not exactly going to have happy team members."

During its bankruptcy that ended in 2005, US Airways Group LCC.N, which later merged with America West Airlines, won court approval to throw out the collective bargaining agreement covering thousands of machinists. But the airline later bargained with the union for steep voluntary givebacks.

Northwest Airlines, which merged with Delta after its bankruptcy, used court permission to void a contract with its flight attendants and impose new terms. The workers eventually ratified a new voluntary contract.

Delta, itself, sought permission in 2005 to void a contract with its pilots but never received it because it negotiated a contract before the judge ruled.

United Airlines, which cut labor costs twice during its bankruptcy by more than $3 billion, asked for court permission to void contracts both times but later agreed to consensual deals with its unions.

United later merged with Continental Airlines to form a new United Airlines, owned by United Continental Holdings (UAL.N).

"Rational, economically-minded entities usually come to the table and work these things out. And I would expect that to happen here," said Wolf. "None of us like to leave these matters to the court."

AMR Corp, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.

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